Worst of all, they have no way to hide it was a hack, even the People’s Daily published the picture. Perhaps the party media does not consider websites as part of China’s glorious industry and it is not concerned with covering up. Not like they could have hidden it anyway, but I find it interesting that they didn’t try:

This reminds me of yesterday’s article on Caixin, coincidentally titled: Page Not Found. It explains the very unusual situation of a Chinese internet  industry that is averse to innovation.

But in addition to the domestic environment’s impact, rottenness inside the industry deserves some blame for the crisis. Whirlwind development led to stories of overnight riches, which in turn attracted a significant number of unqualified entrepreneurs with questionable motives. The industry now looks at innovation as risky, while copycats seek instant success with online games, cheap content and plagiarism. They exploit regulatory loopholes or do business in the economy’s gray zone.

I don’t want to read too much into a simple incident, but it is kind of a big deal in the first Chinese Nasdaq company, a website ranked N1 in China and N8 in the World. I can’t help feeling that Baidu have been too long sitting on their cozy market share and government protection, selling search results or luring in users with copyrighted mp3 for download. Instead of innovating and improving their security.

To be sure, Baidu also brings out some new stuff once in a while, and I quite like the Baidupedia to look up Chinese things. But when you compare with Facebook, Twitter or Google, you see those companies are constantly taking risks to try out new ideas, while Chinese sites tend to sit around and copy. I mean, surely you can’t run an internet company like you are running a steel mill?

Just a coincidence, probably, but the COO of Baidu stepped down yesterday “for personal reasons”.

H/T Danwei and CDT.

UPDATE: It is 7pm and baidu.com is still on and off. The rest of the services, baike, mp3, etc. all work properly and can be accessed through baidu.cn, but the main page is down at this moment.  Downtime close to 10 hours already.

“Who gets rich in China? The Chinese!”

I am afraid I don’t have a better answer now than I had then, but recently I’ve been talking business with some entrepreneurial friends, and one problem has come up so many times that I think it is worth a post. And I hope this is useful for foreign start-ups in China to avoid making a bad decision from day zero and ending up, a few years down the line, mumbling the bitter phrase. The problem I refer to is the market dilemma, otherwise called the expat trap.

The Expat Trap

The idea is simple. In China there are two completely different markets: the massive Chinese market and the tiny market (but strong in per capita spending power) of the foreigners stationed here. If you plan to sell something in China, you need to choose one, and usually there is only one good choice. Of course, most large companies are after the Chinese markets, and the question expats/locals never arises. But for small entrepreneurs planning to start a venture in China, it is an essential decision, and all too often they take the easy road.

The expats are rich, they are accessible, they speak the same language and they have lots of time to spend reading your website or speaking about your product. Who wants to dive into the complicated world of the Chinese, where competition is cut-throat and many consumers have the wrong tastes? For many first-time China entrepreneurs, expat is the obvious choice, and so they move on with their idea. And sometimes they make a good job of it and they build up a nice little company that becomes popular in the expat community. And then, they are in the trap.

Now, I don’t pretend to have a solution for everyone, and surely not all business ideas area applicable to the Chinese market. But the point is many startups don’t give enough consideration to the market question. Even businesses that were intrinsically meant for foreigners can find ways to appeal the Chinese public. Look, for example, at the popular Chinese teaching company ChinesePod, which is now looking to turn around its business with the new website: EnglishPod. Unfortunately, this change is often impossible for a company unless it has been looking at the Chinese consumer from the beginning.

The barriers are enormous to switch markets: the product positioning, the culture of the company, the pricing strategy, all things you can’t change without upsetting your existing customers. Language is also a big problem, especially in the case of internet companies with active content, which find translating a whole website into Chinese is an impossible task.  Finally, the company has not been learning about the Chinese all this time, and chances are somebody else has instead. By the time a successful start-up figures out it should be looking into the Chinese markets, there are already a bunch of Chinese copycats that have taken its place.

In most of the cases, starting a company focused on expats is just a bad decision. Some might argue: there are enough expats in China to run a successful business, and there is nothing wrong in staying small. Right, they might be the kind of pretzel-selling Marge Simpson who is contented with little, but normally this argument just hides frustration. If you came all the way to China to start a business it is because you had big ideas in mind, and the only big thing here that you don’t have in Europe is the Chinese market.

Put it this way: you have moved across continents to have access to a market of 500,000* people at most, roughly the population of Luxembourg, and probably with a lower average income. Besides, these Luxembourgers are weird clients. They keep moving out all the time and a large part of them is replaced every year, which has a strong impact in their loyalty. Worse still, although their numbers are growing, the trends in expatriation policies indicate that their average income will be going down, as massive expat packages disappear from the scene and more locals are able to do the jobs expats used to do.

And the answer to the Question

Of course, the expat trap is only applicable to companies selling in China. Some business models are doing just the opposite, selling China to the World. Often they sell information, and their markets are far away, which makes them resistant to Chinese traps. Another possible exception might include businesses that manage to franchise their model to other expat cities around the World, or even run it back home. This is possible in theory, especially for internet companies, but I don’t know many start-ups around who have succeeded.

On the other hand, I know many companies in China that have seen the expat market work as a sweet bait, and then found themselves caught in a dead end. I was going to give some examples here, but I don’t like to hurt the image of companies that I know and admire in other ways. Instead, I can give a couple of examples of foreign entrepreneurs, like the ones behind Tudou, Neocha or DaD, who worked with Chinese partners and got their markets right from the outset.

So, in conclusion, if you are an entrepreneur and you plan to sell in China, beware of the dangers of the expat trap. And for the curious who scrolled down this way, this is and has always been the correct answer to the question above:

Who gets rich in China? Those who find their way to the Chinese market.

NOTES

* I am, of course, only considering Western expats. The large Korean and Japanese communities tend to have their own companies here, and are usually not a good customer base for Western companies. Other communities, like Russian workers, are also difficult for Westerners. Remind me to do a post about the number of foreigners in China.

Today I am starting my review section with one of the books on Chinese economy that has impressed me most in the last year, “Capitalism with Chinese characteristics”, by MIT professor Huang Yasheng. It is a book that clearly stands out from the recent China books, and it might be destined to become one of the big references in the field.

There is no shortage of good China books in the last years. Many are written from a business perspective, by people with first hand experience who will tell you exactly how things are done here. Others look at the available economic data and build interesting theories to explain them. Few go deeper than this, to look into the heart of the matter: the politics behind the Chinese economy.

The problem is:  it is so difficult to obtain reliable information on Chinese policy that most efforts in this field turn into circular arguments over the same limited data. Professor Huang breaks the circle by going back to the sources and questioning directly all the mainstream assumptions, leaving many of them upside down. The situation in China requires this approach, as he says in the preface:

In studies of American economy, scholars may debate about the effects of, say, “Reagan tax cuts”. In studies of the Chinese economy, the more relevant question would be, “Did the government cut taxes in the first place?

By going back to the archives of what, in his own words is “some of the world’s most medieval record keeping”, Huang Yasheng is able to come up with a whole new picture of Chinese economic policy in the last three decades. This book is the result of painstaking archival research into rarely examined files, such as a “22 volumes compilation of internal bank documents” or the archives of the Ministry of Agriculture.

A qualitative leap from the classic tea leave reading, and one that deserves some careful consideration, even if the conclusions drawn will not be to the taste of every reader.

The book

“Capitalism” is the work of an academic, it is published by the Cambridge University Press and it comes with all the scholarly bells and whistles. But the occasional reader should not let this scare him off it. It is a readable piece, with chapters drafted following the tested formula: attractive anecdote – presentation of the argument – easily skipped statistics – groundbreaking conclusion. Add to this some juicy celebrity bashing (including Nobel J. Stiglitz) for just the right spot of gore, and you get a read that you can thoroughly enjoy. Selling for a surprising  23$ (cheap for a Cambridge Uni hardcover) this is clearly a book designed to be read.

I will not do a detailed summary here, you can find some more in this excellent review posted last month on China Beat. Instead, what I will do is highlight some of the points that Huang makes that I find most relevant. These they are, as I understood them:

• China is much less capitalistic today than most observers assume it to be. The real miracle of private entrepreneurship happened in the 80s, but has since been deliberately suppressed, largely through financial repression.

• The 90s and 00s policies favour FDIs and large SOEs against privately owned Chinese companies on one hand, and the cities against rural areas on the other, with very negative effects on some aspects of the economy. These aspects, which are not represented in the sexy GDP figures, are essential to ensure the sustainability of China’s growth. They include: education, productivity, creativity, entrepreneurial spirit.

• The large developed cities, and Shanghai in particular, are Potemkin metropolis. The sparkling new infrastructure of Shanghai and Beijing, from the Maglev to the recently burnt CCTV tower, are for a good part “white elephants”. While these investments -mostly executed by SOEs-  have helped boost the economy in the 90s, they have questionable returns in the long term, and their opportunity cost will have to be paid dearly.

• China is failing to develop the necessary “soft infrastructure” to ensure a sustainable economy. Worse still, it has actually regressed in this field during the last decade. This spells trouble for the future. The “soft infrastructure” – a term used in many China books and which I suspect originates from previous Huang Yasheng works – refers to those immaterial conditions such as the rule of law, open financial institutions, a civil society and entrepreneurial spirit that many consider essential for the long term development of an economy.

Wrong Shanghai: Observations on the Ground

The book opens with a statement that is sure to catch the eye of many living in China: there is something wrong with Shanghai.

Yes, no less than Shanghai, the city that has been fooling us for years with its aura of dynamism and openness. Huang Yasheng arguments, with precise data in hand, that entrepreneurship has long been eliminated from the city.  Shanghai’s wealth is made of SOEs, FDIs and transfer of resources from other parts of China. It is in fact an economy of CPC members and risk averse “iron bowls”.

From my viewpoint of an observer on the ground, it is this statement that I found most exciting. I went straight to chapter 4 and then I went straight to ask all my Shanghainese friends what they though of it. The response I got almost unanimously: “No kidding, do you need to read a 300 pages book to see this?”

Which led me once again to this reflection:  We continue to pay too much attention to foreign experts, and not enough to the Chinese themselves. In spite of the growing efforts of bridge bloggers and media, there is still a massive divide between the two worlds. The successful China books are mostly written by foreigners who don’t read and write Chinese. It is still too easy for an old China hand to position himself as an expert in everything China. And the circle feeds itself.

And the sheer dismalness of it all

It is always amusing to read these scholarly works in social sciences, where findings are measured against some -ism pattern, and where partisans tear each other apart mercilessly.

Reading this book one cannot help feeling that there is an underlying model in all of its arguments. A conviction -some might call it an ideology- that free markets, a small state and liberalism are the fundamental bases upon which a healthy economy is built, and that there can be no long-term “China miracle” based on exclusive “Chinese characteristics” if it doesn’t follow this model. A line of thinking that is understandably very critical of the Chinese policies in the 90s and early 00s.

On the other hand, while this partisanship may lend the book a more unscientific feel than one might like -and what is so scientific about economy anyway- , it also makes for a more compelling reading, not unlike watching a football match where the author scores a spectacular hat-trick. Should anyone be ruffled by the treatment of authors like J. Stiglitz, I would suggest a read of his own popular book “Globalisation” to get a taste of what it means to tear apart your opponent.

Of course, the problem with all this is that it makes all works very vulnerable to world fashions. “Capitalism” was written before the financial crisis developed, and unfortunately for Huang Yasheng, the winds of economics are since blowing in the opposite direction. The moment marked last year by the fall of Lehman Brothers  and the crowning of some other partisans have tipped the scale to the Big State ideas. More importantly, China’s economy is still holding strong compared to the West, and this is feeding the side of those who feel that China’s miracles can save the World from the greedy free-market ideas of the Washington consensus.

While I am of the opinion that China has still a lot to offer to the World, and I certainly see some sense in the famous Beijing consensus in the field of international politics, when it comes to economic policy I tend to agree with Huang Yasheng’s point of view. Being based here and working daily with Chinese companies, it is just too difficult to believe in the soundness and “entrepreneurialness” of China’s economy.

In any case, and whatever the opinion of the reader, Huang Yasheng drives his points home with argumentative skill, and making good use of an admirable research work to shed light on some of the least understood aspects of China’s economic development. Moreover, it is to his credit that, based on the new data, Huang goes against his own previously held ideas -namely, that the 90s reforms were more far reaching than the 80s. It is always comforting for this humble, unenlightened engineer to see that, in social science too, empirical data can change a theory rather than the opposite.

Who knows, it is very possible that the economy’s Wheel of Fortune will turn again sooner than we expect. Then China’s  economic system might suddenly show all its contradictions, and people will need to turn to books like “Capitalism” to try to understand what has been going on all this time.